Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene with
Speaker 1: David Gura. Daily we bring you insight from the best
Speaker 1: of economics, finance, investment, and international relations. Find Bloomberg Surveillance
Speaker 1: on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course
Speaker 1: on the Bloomberg Let's count to ten, but let's do
Speaker 1: it in Greek. That's what quants do. Matthew Rothman, formerly
Speaker 1: enormous it Lehman Brothers it wasn't his fault they went
Speaker 1: down in flames, is now at Credit Squeeze. He's had
Speaker 1: a global quantitative equity research and really has major credit
Speaker 1: out of Chicago. In the Greek letters and trying to
Speaker 1: figure out in this quiet time of low volatility, want
Speaker 1: to do? Joining us well, taking notes, Gabrielle Santos of
Speaker 1: JP Morgan, Matt, wonderful to have you with us here
Speaker 1: this morning. I wanted to a look back of ten years.
Speaker 1: We all read Fooled by Randomness, We read this that
Speaker 1: other quantz stuff. I think of ken Osban and binomial
Speaker 1: clouds and Bob dot dot. Have we learned anything? Are
Speaker 1: we any smarter ten years down the road than the
Speaker 1: quants were ten years ago or a lot smarter today
Speaker 1: than we were ten years ago. Um, we're really now,
Speaker 1: I would kind of say, almost in quant three point oh,
Speaker 1: where ten years ago we were really at the end
Speaker 1: of quant one point Um. We've learned a lot more
Speaker 1: about how to get out of each other's way, We've
Speaker 1: learned a lot about trading, We've learned really what other
Speaker 1: people know U and really have. The world has become
Speaker 1: so much more digitalized every day. Uh, and so just
Speaker 1: the levels of data that we have, machines that are
Speaker 1: at our at our fingertips are just so much more powerful.
Speaker 1: Um that we've just made a lot of advance. Whether
Speaker 1: it's seven or or two thousand seven, it's about blown
Speaker 1: up certitude of hedges or arbitrage, or I've got a
Speaker 1: constructed trade that blows up, maybe it's leverage or whatever.
Speaker 1: What is the constructive trade of two thousand and seventeen
Speaker 1: that worries you? What worries me is um one. There's
Speaker 1: just been a a rush into quant and there's almost
Speaker 1: been a little bit of a mania on the belief
Speaker 1: that of what machine learnings can do, can can do
Speaker 1: for you, uh, and what what it's capable of. I
Speaker 1: think we need to take a step back and really
Speaker 1: think about where we are and what it can do
Speaker 1: and can't do. Full editorial agree with that statement, and
Speaker 1: you see the FT article today which really shows the
Speaker 1: wall of money going into your world not seeing till
Speaker 1: Eban is anti fragile, talks about stressing and testing the system,
Speaker 1: about robustness found through small failures. Are we there yet?
Speaker 1: Are we more anti fragile where you've got a greater
Speaker 1: confidence in the system. I think that what we've really
Speaker 1: learned was what I learned the first day in my
Speaker 1: class at the University of Chicago, where Eugene fam I
Speaker 1: kind of came in and said, everything I'm going to
Speaker 1: teach you is long. It's a model, right, and we
Speaker 1: know it's a model, it's not reality. And I think
Speaker 1: that most quants are very careful now to understand where
Speaker 1: their models fail. What I worries me is that that
Speaker 1: becomes a lot harder when you get into the deep
Speaker 1: learning machines UH and artificial intelligence to really understand what
Speaker 1: your machines don't know. If you don't really know what
Speaker 1: your machines are doing and how they're doing it. And
Speaker 1: I think those are the kind of systematic failures that
Speaker 1: worry me, Matthew, where do you think the next financial
Speaker 1: crisis will come from? What worries me most about that
Speaker 1: is that we've been in an area an era of
Speaker 1: very low volatility UH and in an era of particularly
Speaker 1: low dispersion across returns, which is different than volatility. General
Speaker 1: volatility can be driven by macro events UH, and so
Speaker 1: you can see the VIX spike on macro news, but
Speaker 1: all stocks may or may not move together at that point.
Speaker 1: What's really remarkable about this time is that we've seen
Speaker 1: very low dispersion across returns idiosyncratic news as we kind
Speaker 1: of call it, an individual stock specific news, Those features
Speaker 1: are very low, and so that, more than the VIX
Speaker 1: being low, is what I think leads people towards leverage UM.
Speaker 1: And so what we really need to see is um
Speaker 1: for some kind of orderly pick up in dispersion across returns. Matthew.
Speaker 1: What I'm trying to get at, right is that you're
Speaker 1: saying that quants are more careful now, so that they
Speaker 1: learned things in terms of models that they look and
Speaker 1: the analysis that they're going through because of financial crisis.
Speaker 1: But what if we had a financial crisis or a
Speaker 1: crisis that came from something that we had to even
Speaker 1: thought about. What does that mean for your models, the
Speaker 1: quants models? It means something bad for everybody's models. Uh.
Speaker 1: You know, if there's something that none of us can foresee,
Speaker 1: of course your quant models aren't going to look at it,
Speaker 1: and of course your fundamental analysts aren't going to get it.
Speaker 1: It's bad for everybody. Okay, this is this is really important. Man.
Speaker 1: If you bring up this chart, this is where Gabriel
Speaker 1: Santos is living every day, and the low of the quiet,
Speaker 1: you can look at any sset classes happens to be
Speaker 1: the VIX and the quiet down to nine point nine
Speaker 1: eight right now on the VIX. Is it harder for
Speaker 1: you to have certitude about fancy quant systems given dampen
Speaker 1: volatility in that all of these you know, the media
Speaker 1: talks about them's linear functions and straight lines and you
Speaker 1: and I know they're not. Is there almost a risk
Speaker 1: of a convexity an acceleration of outcomes and bad outcomes
Speaker 1: because of where the VIX is right now? You know,
Speaker 1: the VIX is very important to look at um and
Speaker 1: to understand volatility, but it doesn't measure the volatility that
Speaker 1: concerns quants the most, which is that we want to
Speaker 1: look at the dispersion among returns. So if everything is
Speaker 1: moving together exactly, that makes it very hard. That's different
Speaker 1: than time series volatility or macro shock volatility, and um,
Speaker 1: so I'm less concerned with macro shock volatility, but I'm
Speaker 1: really concerned about if you have a huge dispersion for
Speaker 1: some reason that was to kick up in across returns. Okay, well,
Speaker 1: one one final question on this. We're gonna geek out
Speaker 1: here on the back end of the time series function
Speaker 1: as an epsilon. Gabriella learning this in Pennsylvania. Some of
Speaker 1: them struggle through it with the CEF. Hey on the
Speaker 1: back end of a linear function. Thank you. James Hamilton
Speaker 1: out at San Diego. Is this epsilon? Do you have
Speaker 1: a clue or does she have a clue, or does
Speaker 1: Jamie Diamond have a clue? Or Nil saus have a
Speaker 1: clue where the epsilon is in this system? Today? You know,
Speaker 1: we do have some clues on where the epsilons are. Um.
Speaker 1: If you're a good quant you are stressing your models
Speaker 1: all the time exactly, and you're trying to understand what
Speaker 1: doesn't what don't you know? Uh? And that is what
Speaker 1: is most dangerous. Uh. And that's true whether your quant
Speaker 1: or not. Now take the brilliance of this gabriella over
Speaker 1: to your world. You have to explain to pools of money,
Speaker 1: the Rothman world. How do you take his world over
Speaker 1: to mom and pop with a pot of money or
Speaker 1: an institution with a pot of money. So a couple
Speaker 1: of the concepts we were discussed saying, first of all,
Speaker 1: in terms of all until day, that's a conversation we've
Speaker 1: been having a lot with, as you called the mom
Speaker 1: and pop Inbustorum. Our view on low volatility um is
Speaker 1: that this is a very different world than it's been
Speaker 1: for the last six years. Volatility in terms of economic
Speaker 1: data is much lower than it used to be. You
Speaker 1: now have a much better, much more solid global economy,
Speaker 1: and the volatility and earnings has improved as well. So
Speaker 1: we would this low volatility to us makes sense and
Speaker 1: that's something we've been trying to explain to our investors. Okay,
Speaker 1: this has been fabulous. We're gonna put this conversation with
Speaker 1: Miss Santos and Dr Rothman out on iTunes on the
Speaker 1: podcast today this is extraordinary, and I'll throw some books
Speaker 1: out on social media as well to keep up, including
Speaker 1: Sheldon Atenberg's classic on the Greek letter, James David's uh,
Speaker 1: among other things, was an admiral in the Navy, and
Speaker 1: like all people going up the food chain, he even
Speaker 1: spoke to marines, having forbid on destroyers, on aircraft carriers,
Speaker 1: and even spoke to other parts of our military operations. UH.
Speaker 1: Mrs de Retus has moved on to international relations at
Speaker 1: the Fletcher School of Tuft University. His book, The Leader's Bookshelf.
Speaker 1: The Leader's Bookshelf is my book of the summer. I
Speaker 1: can't say enough about it. Is just absolutely spectacular, giving
Speaker 1: you a wide set of books. Admiral, good morning, great,
Speaker 1: it's going very good. In the back of The Leader's Bookshelf,
Speaker 1: you spend more time on a general from Brighton, Massachusetts
Speaker 1: than anybody in your book, maybe with the possible exception
Speaker 1: of Maddis, but there's a beautiful point there where you
Speaker 1: have Kelly of Boston and Maddis with seven hundred or
Speaker 1: three thousand books in their library. General Kelly is a leader.
Speaker 1: The president is not. What will General Kelly teach the
Speaker 1: president of the United States. Well, going back to the book,
Speaker 1: the Leader's Bookshelf, I would suggest that John Kelly pulled
Speaker 1: the book out and talked to the President about three
Speaker 1: books that are in there. One is by his National
Speaker 1: Security advisor, General H. R. McMaster. It's General Election and Duty,
Speaker 1: and I think Kelly needs to say to the president,
Speaker 1: Mr President, my intention is to speak truth to your power,
Speaker 1: as the Joint chiefs of Staff did not do during
Speaker 1: the war in Vietnam. The second one is Doris Kearns
Speaker 1: Goodwin's Team of Rivals and the idea that we can
Speaker 1: have rivals in this White House, but at the end
Speaker 1: of the day, it has to be a team, not
Speaker 1: just a team of rivals. And then thirdly, I think
Speaker 1: the book that uh Donald Trump ought to read is,
Speaker 1: and this may surprise you a Connecticut Yankee and Keen
Speaker 1: Arthur's Court for Innovation for Change, because he's got to
Speaker 1: change the way he's doing business at this point. Now.
Speaker 1: General Kelly, even with all of his characteristics, may not
Speaker 1: be able to get the President to read those books,
Speaker 1: but he can talk to him about them. He can
Speaker 1: drive on those principles and hope to bring some order
Speaker 1: out of chaos in the White House alongside Ivanka Trump
Speaker 1: has been quoted as saying she's thrilled to be alongside
Speaker 1: the marine general. Tell me about command and control in
Speaker 1: the world is of Rita's or Kelly? What does that
Speaker 1: actually mean? When the media talks about general's coming in
Speaker 1: with command and control, translate that. So when I was
Speaker 1: the Supreme Alley Commander of NATO, I had control of
Speaker 1: hundreds of thousands of forces. And the one thing you
Speaker 1: learn early on in a military career is that there
Speaker 1: can be only one chief of staff. My chief of
Speaker 1: step by the way, Tom was a German four star general,
Speaker 1: and you haven't seen order and discipline that you've seen
Speaker 1: that German general as a chief of staff. Um. And
Speaker 1: I think John Kelly knows this equally well. He was
Speaker 1: commander of Southern Command while I was over there in Europe,
Speaker 1: and he will seek to drive home the principle that
Speaker 1: no one stands alongside the chief of staff. That just
Speaker 1: doesn't work, and we saw it blow up already with
Speaker 1: the previous ban and arrangement. There's only one way to
Speaker 1: run the staff and a book Bonka. Trump wants to
Speaker 1: be on the staff and not just be an exocicio adviser.
Speaker 1: That's a different role. But if she wants to be
Speaker 1: on the staff, she reports to the key word here
Speaker 1: chief of Staff, and well Strees, let me ask you
Speaker 1: a question here about how you might approach this job.
Speaker 1: Something that's been highlighted here in recent days is that
Speaker 1: John Kelly doesn't have a whole lot of experience dealing
Speaker 1: with Congress. A lot of what the chief of Staff
Speaker 1: does is finesse the president's agenda with the legislative agenda
Speaker 1: on Capitol Hill. If you were in his shoes, how
Speaker 1: would you foster or build that relationship or better that
Speaker 1: relationship between the White House and the Congress. Great point,
Speaker 1: David um One. A little notice thing about John Kelly
Speaker 1: I'll add to the conversation is that he spent two
Speaker 1: years on Capitol Hill as a one star Marine general
Speaker 1: in charge of the U. S. Marine Corps relationships with
Speaker 1: the Congress. So he has traveled, he has interacted. He
Speaker 1: is well known up there, not as a political figure
Speaker 1: but as a military figure. So the key for him,
Speaker 1: Your point is that he has to be able to
Speaker 1: translate his previous role on Capitol Hill of representing Marine
Speaker 1: Corps to now representing the President of the United States
Speaker 1: and the executive branch. He needs to talk to the
Speaker 1: people on the hill, use the personal relationships he has,
Speaker 1: but convinced them that he can make that transition, and
Speaker 1: I think he can. I interviewed him shortly after he
Speaker 1: became the Secretary of the Department of Homeland Security, and
Speaker 1: I was struck by his sense of duty. He told
Speaker 1: me that he hadn't met the president before their first
Speaker 1: meeting after Donald Trump had been elected president. He was
Speaker 1: asked to do the job right after that. As I said,
Speaker 1: a real sense of duty evaded his conversation about what
Speaker 1: led him to take that that job. From your your
Speaker 1: relationship with him, knowing him, help us understand why he
Speaker 1: would take this job. This seems like a real dog's
Speaker 1: dinner in a way to become White House Chief of
Speaker 1: Staff at this point, Uh, well, I know John Kelly
Speaker 1: for over four years. We were a young lieutenants banging
Speaker 1: around on Carrier Forestall back in the late seventies. Um,
Speaker 1: and he is all about dude. He comes out of
Speaker 1: a tough neighborhood in Boston, where you stand with your friends,
Speaker 1: you work for someone, it matters. The relationships you have
Speaker 1: are who you are. So it is a dog's breakfast
Speaker 1: for him to shift the meal time slightly. And I
Speaker 1: think that that General Kelly took the job because he
Speaker 1: thinks he can help the country move forward. His whole
Speaker 1: life has been about that. Well. I agree with that
Speaker 1: on duty and of course you know some of the
Speaker 1: critics have said the president was born on third base.
Speaker 1: General Kelly was out of the grand stand as the
Speaker 1: chief seats of fenwayn park Um on page one of
Speaker 1: your book, and again, folks, the leader's bookshelf my book
Speaker 1: of the summer. I'd also note that Stravidez doesn't stop
Speaker 1: writing every day see powers jaw dropping view of our
Speaker 1: oceans as well. But Admiral, you've got the chief of
Speaker 1: Staff of the Army or Di Naro writing about George Marshall,
Speaker 1: who is of generation before us, their hero. And one
Speaker 1: of the features here is speak your mind, George Marshall
Speaker 1: on speak your mind. How does anyone thought, as someone
Speaker 1: with a charm of General Kelly actually sit the commander
Speaker 1: in chief down and go, no, sir, this is how
Speaker 1: we do it. Can you envision that's going to occur?
Speaker 1: I do Tom, and he'll do it exactly the way
Speaker 1: you just said. It, but he'll do it privately. It
Speaker 1: will not be leaked. You and I aren't going to
Speaker 1: be talking about the details of those conversations. And I
Speaker 1: think General Kelly will establish rapport with the President that
Speaker 1: allows him to uh take the bark off the tree,
Speaker 1: as don rumsfl calls it, and really have that conversation.
Speaker 1: If he does, he'll succeed. If he cannot do that,
Speaker 1: he will fail. And I'd say there's a better than
Speaker 1: even chance that he'll succeed, but not much over a
Speaker 1: better than even chance. Let me get you to react
Speaker 1: to the announcement that was made on Twitter last last week,
Speaker 1: a policy announcement from the President. Tom and I were
Speaker 1: on areas. These three tweets came out of the President
Speaker 1: saying that the transgender individuals will not be allowed to
Speaker 1: serve in any capacity in the US military. I wonder
Speaker 1: if you could just react to how that announcement was
Speaker 1: handed down and if you were a commander at this point,
Speaker 1: what you would make of of of that directive communicated
Speaker 1: in three three tweets of a hundred forty characters each. Yeah,
Speaker 1: I think it would be extremely charitable to call it
Speaker 1: a policy at all that Um, they really was a
Speaker 1: series of disconnected tweets. You've watched both the uniform military
Speaker 1: in the Department of Defense effectively walk away from it,
Speaker 1: uh and say, hey, if you are transgender and you
Speaker 1: are an active duty you're gonna continue serving until the
Speaker 1: policy actually changes. It's a pretty good example of why
Speaker 1: Jim Maddis took the right course of action when confronted
Speaker 1: with a set of decisions. And these are decisions that
Speaker 1: have to be made about whether we perform surgeries, whether
Speaker 1: we take people as they are, what what are the
Speaker 1: specifics of this? And General Man has said, look, I
Speaker 1: need six months to figure this out. He's in the
Speaker 1: middle of doing that. So for the president to try
Speaker 1: and pre empt something uh, this sensitive makes no sense.
Speaker 1: And I think, frankly, those tweets have been relegated to
Speaker 1: the tweet bin of history at this point. And you're
Speaker 1: going to see the military. You're gonna see the military
Speaker 1: figure it outcome to the president regular order, make a recommendation,
Speaker 1: then we'll have a policy going forward. That's how you
Speaker 1: do business. And James Travites of course at Toughs the
Speaker 1: Fletcher School. His new book is Seapower History and Geopolitics
Speaker 1: of the World Oceans. The opening of it is absolutely spectacular.
Speaker 1: Young stevidies translating tweets on the deck of the destroyers.
Speaker 1: It goes out of San Diego Harbor, and he had
Speaker 1: to take his dramam me no, I'm kidding. Anyways, Stevinus
Speaker 1: will be with us the Seed Powers, wonderful new book,
Speaker 1: a surprising book on our oceans, and of course the
Speaker 1: Leader's Bookshop. We will continue where the Admiral Strevinus much more,
Speaker 1: of course, on international relations and your Washington. This is
Speaker 1: Bloomberg yesterday afternoon, animal Stevidus. So we had a moment
Speaker 1: in foggy Bottom we haven't had in a while. The
Speaker 1: Secretary State waltzed out to a podium and spoke to
Speaker 1: reporters for a pretty extended period of time. He marked
Speaker 1: at the end of six months in that office. And
Speaker 1: one of the things that he talked about was the
Speaker 1: U s relationship with Russia. And he said that he
Speaker 1: talked to President Putin and to Sergei Lavrov, the Ford Minister, recently,
Speaker 1: and told him that while the relationship is bad between
Speaker 1: the US and Russia, indeed it could get worse. The
Speaker 1: Secretary State scheduled to meet with Mr laugh Rov in Manila,
Speaker 1: I believe later this week give us your sense of
Speaker 1: the state of this relationship now and your prescription for
Speaker 1: what Secretary Tylorson could do to mend things a little
Speaker 1: bit here going forward. First of all, it's good to
Speaker 1: see the Secretary out and about and actually conducting some
Speaker 1: public diplomacy. He needs to do a lot more of
Speaker 1: that than he has been, and that's salutary. In terms
Speaker 1: of the relationship with Russia, David and Tom were at
Speaker 1: the lowest point since the end of the Cold War.
Speaker 1: I'd say that we have still some further bottom below us, however,
Speaker 1: and what we need to be doing is confronting Russia
Speaker 1: where we have to things like Syria where they support
Speaker 1: a brutal dictator, Ukraine where they've annexed Crimea, the cyber
Speaker 1: intrusions above all into our own electoral process. We have
Speaker 1: to confront where we must, but we should cooperate where
Speaker 1: we can. We have to look for some zones of cooperation.
Speaker 1: At the moment there are few and far between. But
Speaker 1: if I were the Secretarian State, I would put cooperation
Speaker 1: in Afghanistan, cooperation in the Arctic, cooperational counter terrorism and
Speaker 1: cooperation and counter narcotics at the top of my list.
Speaker 1: So you can at least keep a dialogue open confront
Speaker 1: where you must cooperate where you can and over time,
Speaker 1: let's hope that this Russian investigation is completed. We need
Speaker 1: to get that behind us, find out what happened, respond
Speaker 1: to it before we can really repair this relationship. We
Speaker 1: had news at the beginning of the week here Russia
Speaker 1: expelling or requesting that two thirds of our diplomatic staff
Speaker 1: in Russia leave that country. Aside from the symbolism of that,
Speaker 1: and sure enough there there, there is a lot of
Speaker 1: it there. What are the consequences of that, This this
Speaker 1: back and forth with regard to diplomatic personnel, it will
Speaker 1: further degrade relations between the countries. It's unfortunate that it
Speaker 1: occurs just as we begin to move our new ambassador
Speaker 1: to Russia, very competent uh individual John hunt Smun, former governor,
Speaker 1: former ambassador to China. Uh. He's moving towards Moscow now,
Speaker 1: but he'll arrive with a gutted staff and that he's
Speaker 1: going to create real challenges for him as he tries
Speaker 1: to get his teat on the ground. Top. We could
Speaker 1: talk for three hours this morning, Ed, Well, let me
Speaker 1: ask you about David and Nish's the Washington Post this
Speaker 1: morning with just a scathing and interesting and smart op
Speaker 1: ed on China. He talks about how the Secretary of
Speaker 1: Commerce has been humiliated by the White House. The White
Speaker 1: House was strong, harsh language, untraded on sanctions, and then
Speaker 1: the Secretary of Defense has to deal with the same
Speaker 1: dialogue of threats to the Korean How does a pro
Speaker 1: like you synthesize the bellicost nature of a White House
Speaker 1: that even defeats two visible and principal cabinet officers. But
Speaker 1: I'm really worried about with China, Tom, The big prize
Speaker 1: in this uh, in this relationship between the United States
Speaker 1: and China, is the South China Sea, which is full
Speaker 1: of hydrocarbons, which is the one piece of the puzzle
Speaker 1: China doesn't happen. They don't have oil, they don't have
Speaker 1: natural gas. They want control of those shipping lanes. This
Speaker 1: is a vast body of water size in the Gulf
Speaker 1: of Mexico, and we're gonna twist and turn over it.
Speaker 1: In this relationship, the White House has got to construct
Speaker 1: a fundamental strategy for how we're going to approach China
Speaker 1: because China is playing the long game and they're gonna
Speaker 1: say quickly if we don't map, does this start with
Speaker 1: the Philippines? I mean, how do you how do you
Speaker 1: develop a dialogue with the Philippines? And Mr Doutarte I
Speaker 1: would put Mr to Turk in the ice box at
Speaker 1: the moment. We're just not going to get anywhere with
Speaker 1: the Filipines while he's there. We ought to be focused
Speaker 1: instead on Vietnam and Malaysia, the two other principal name
Speaker 1: around that about China Sea never enough time. Thank you
Speaker 1: so much. I can't say enough about his two books
Speaker 1: see Power on Your Oceans. It is illuminating in my
Speaker 1: book of the Summer by James te Vitas and Manning Ansel,
Speaker 1: The Leader's Bookshelf. I just rave about it. It's just
Speaker 1: a fabulous, fabulous book. Throw it at every single board
Speaker 1: kid at home and say shut up and read some
Speaker 1: of the books in this book. That's what John Tucker
Speaker 1: did this summer with his kids. My colleague Alex Steel
Speaker 1: sitting down with Lloyd blank Find and Michael Bloomberg. Here
Speaker 1: is Alex, Lloyd tell us why we're here in Baltimore today,
Speaker 1: we're here in Baltimore to um to attend a graduation
Speaker 1: of our first cohorts in our program ten thousand Small Businesses,
Speaker 1: which is something which is a program that educates kind
Speaker 1: of a mini n b A, if you will, for
Speaker 1: established but established small business people who are in the
Speaker 1: threshold who have the potential for explosive growth, and we
Speaker 1: provide a lot of education, mentor ship in some cases
Speaker 1: financing to get them over that hump and to have
Speaker 1: them grow and then to hire people to get on
Speaker 1: that virtuous cycle of more hiring, more employment. Therefore more
Speaker 1: small businessmen get their products bought, etcetera, etcetera. So you know,
Speaker 1: it's uh, it's the example of a program that we've
Speaker 1: done in fourteen other cities around the country and it's
Speaker 1: been very successful for us graduates. But for the first time,
Speaker 1: Mike Bloomberg Philanthropies and Goldman is going to usher another
Speaker 1: ten million dollars to the fund really to promote in Baltimore.
Speaker 1: If you had this when you were starting out, what
Speaker 1: would that have been like for you? Well, I might
Speaker 1: have been success. Might have been success. I mean, you know,
Speaker 1: I got ganging at Solomon Brothers. But funny thing we're doing,
Speaker 1: we're copying to some extent Goldman's ten thousand Small Businesses
Speaker 1: with Mayors. So we've had a bunch of program program
Speaker 1: where we bring in mayors and train them. We do
Speaker 1: it joint with Harvard University. The Case School and the
Speaker 1: b School helped train In the end, it's management that
Speaker 1: makes these organizations work. Whether it's a company or a
Speaker 1: uh government or even your family. Somebody has to be
Speaker 1: in charge and know how to bring people and make
Speaker 1: them work together and bring them along and train them.
Speaker 1: But small businesses. The ten Small Businesses reaches out to
Speaker 1: people who have already started their business and now they've
Speaker 1: got something going now they need some management training and
Speaker 1: Bloomber Philanthropies is happy to partner with them. But we're
Speaker 1: also doing it for cities may as who have already
Speaker 1: been elected and giving them the management skills. Lloyd, you
Speaker 1: obviously run an enormous company, but for a small business,
Speaker 1: what's the hardest part for them? Now? Some of that
Speaker 1: is very similar. I mean we're all wrestling around with regulation,
Speaker 1: anxiety about whether an investment will be back over time. Um,
Speaker 1: you know what the economic climate is going to be,
Speaker 1: The risk that you take limitation of resources. I mean,
Speaker 1: do you have the bandwidth, do you have enough people
Speaker 1: can to help you manage a bigger enterprise than what
Speaker 1: you have? What are the consequences of it not working out? Uh?
Speaker 1: The only problem is is for a small business person,
Speaker 1: all that's magnified that in many cases it's you, maybe
Speaker 1: you and your immediate family, maybe you and your immediate
Speaker 1: family and three employees or ten employees, and so the
Speaker 1: consequence is a much more dramatic and you know something,
Speaker 1: at the end of the day, Goldman Sachs has departments
Speaker 1: to deal with regulation, to deal with planning, to deal
Speaker 1: with assessing the investment return on a capital good that
Speaker 1: we buy. But in a small business, uh, you don't
Speaker 1: have that. And so what we are trying to do
Speaker 1: is we're trying to give people, um, the the information
Speaker 1: lessons you know, we have on the various segments that
Speaker 1: we bring people through. We have things on business planning, negotiations, strategy,
Speaker 1: how to negotiate with a bank for financing, how to
Speaker 1: estimate the return profile of an investment that you make
Speaker 1: in your business, and Uh, but what one thing we
Speaker 1: do start out with these are fabulous people. We're already
Speaker 1: keep it with taking people, as Mike has alluded to,
Speaker 1: who are already somewhat successful in their business. Their commitment
Speaker 1: is established, their ambition is establishment. The capable that he
Speaker 1: has established there on the threshold possibly of a breakout,
Speaker 1: and that really is a sweet spot for growth relative
Speaker 1: to the investment you put in by getting them over
Speaker 1: that hump. In addition to everything else, I think we
Speaker 1: give them, we give them confidence in who they already
Speaker 1: are and what they've already accomplished. And part of that confidence,
Speaker 1: Mike obviously comes from that support, but also it comes
Speaker 1: from visibility in the economy, and right now that feels
Speaker 1: like visibility in d C. And the story that we
Speaker 1: continually here is that nothing's gonna get done, no change
Speaker 1: is going to happen. Is that the correct story? Well,
Speaker 1: I don't know what the future is gonna hold. The
Speaker 1: Trump administration has only been in office for six months.
Speaker 1: I've always thought that what Trump should focus on is
Speaker 1: building a team. He's been struggling to do that. But
Speaker 1: he'll eventually get it right, I think, and I hope
Speaker 1: the country needs that. But the bottom line is it's
Speaker 1: small businesses. They're creating most of the job growth in
Speaker 1: the country. Big businesses are doing okay. The economy is
Speaker 1: better than most people thought. The stock market certainly seems
Speaker 1: to like what's going on. But the future of this
Speaker 1: country is to create small businesses that will take people
Speaker 1: from the old industries that will eventually downsize and maybe
Speaker 1: even disappear as taste change, technology changes, the marketplace changes,
Speaker 1: and this is where the next group of big businesses
Speaker 1: will come from. They start out small with somebody that's
Speaker 1: got an entrepreneurial spirit. At that point, if Golden Stacks
Speaker 1: steps in or others and gives them some of the
Speaker 1: management skills, they can keep growing. And the transition from
Speaker 1: doing it all yourself to learning how to delegate and
Speaker 1: bring in other people is the toughest thing for small
Speaker 1: businesses to do. Giving up some control and return for
Speaker 1: a depth of bench if you will to continue to grow.
Speaker 1: That's what Golden Stacks ten small businesses can really do.
Speaker 1: And Blomberg Philanthropies with them and similar program keeps saying
Speaker 1: with the mayors and Lloyd, you touched on the other
Speaker 1: part of it, and that's regulation, like give a whole
Speaker 1: department as scared towards that a small business doesn't really
Speaker 1: have that opportunity. Um, what going to be the easiest
Speaker 1: part of regulation that you feel like would be material
Speaker 1: for growth and for woman. Well, I think, um, you
Speaker 1: know the one thing that that you know people are
Speaker 1: talking about, you know, the administration where they're going to
Speaker 1: get things, and you know there's some things that are
Speaker 1: already getting done that you have to say, which is
Speaker 1: that there's a bit of a change in sentiment and attitude.
Speaker 1: And I think the way rules are implemented, the attitude
Speaker 1: of the new new class of regulators that are coming in.
Speaker 1: And again we operate obviously in the financial services, but
Speaker 1: where you know, we're big corporate advisor, re business and
Speaker 1: M and A and so we get involved in every industry,
Speaker 1: and every industry is regulated and tell you the truth,
Speaker 1: in this day a lot more highly regulated than they
Speaker 1: had been. So I would say that a almost an
Speaker 1: instantaneous thing which doesn't need Senator approved in some cases
Speaker 1: doesn't need approval, uh some case it does, but certainly
Speaker 1: doesn't need legislation. Is just the way regulations are implement
Speaker 1: existing laws are implemented, and the attitude towards it. And
Speaker 1: I think we're I think we're already witnessing in some
Speaker 1: of these industries a changing sentiment. What I find fascinating
Speaker 1: his Goldman Sex big company known for being aggressive, phenomenally profitable,
Speaker 1: successful firm with a great history, go back a long ways,
Speaker 1: and they're focusing on the next generation small businesses. And
Speaker 1: you can say, what do they have, what do they
Speaker 1: know about small businesses? Because all businesses, like all cities,
Speaker 1: are the same. People need respect and recognition. They need
Speaker 1: to have a product that people want, whether it's a
Speaker 1: service or something that physically you can touch. They need
Speaker 1: to be able to adjust as the world changes and
Speaker 1: we want to create jobs. And so what I find
Speaker 1: fascinating is Goldman's taking all of their resources or some
Speaker 1: of them and working on the next generation's problem because
Speaker 1: some of those cut those ten thousand small businesses someday
Speaker 1: will be Goldman customers. The making an investment in the future,
Speaker 1: which is great for the country. Yeah, there's a lot
Speaker 1: of big business goes you have to keep growing in
Speaker 1: where to make those. But I you just elaborate a bit.
Speaker 1: It is no thought. I mean, these are very small businesses,
Speaker 1: were very institutional firm. A lot of the impetus for
Speaker 1: us is to have and demonstrate on a human scale
Speaker 1: what we do on an institutional scale. You know, everybody
Speaker 1: who goes you know, if you go into pharmaceuticals, you
Speaker 1: really want to find cures for things. If you are
Speaker 1: in Manufet, you know, people have an ethic and a
Speaker 1: narrative and a sense of purpose that goes beyond making
Speaker 1: a living. And you know, people in our industry also
Speaker 1: we believe in capitalism and the capital markets, in growth
Speaker 1: that gets created by finding capital for entrepreneurs, and the
Speaker 1: virtuous circle of people making money and then paying families
Speaker 1: and they in turn by products from others and spawn
Speaker 1: new entrepreneurs. And we believe in that, and sometimes in
Speaker 1: our business we can lose sight of the human element
Speaker 1: of that because we operate on such a government or
Speaker 1: big corporate or big institutional level that you that you
Speaker 1: don't see the human scale of things. And what makes
Speaker 1: it so attractive in our firm is not that thirty
Speaker 1: years from now someone might grow and become a customer.
Speaker 1: What makes it is that becomes a validation a really
Speaker 1: our purpose in life, other than the mere fact that
Speaker 1: we make a good living doing what we do. We
Speaker 1: really believe, you know, you could do philanthropy and write
Speaker 1: a check and you better write that check every year.
Speaker 1: If it's strictly philanthropy. If you invest in somebody and
Speaker 1: you build a business and that is endors and survives
Speaker 1: and grow, it's not only good for that family that
Speaker 1: has that business, but also the families getting employed about that.
Speaker 1: And that's the virtuous circle that we believe operates at
Speaker 1: a huge scale across the country, but we get to
Speaker 1: see it on a human scale in our ten thousand
Speaker 1: small Business program. I'd like to welcome our TV and
Speaker 1: radio viewers. We're here at the Baltimore Center stage with
Speaker 1: Mike Bloomberg and the CEO of Goldman Sax, Floyd blank Find.
Speaker 1: I want to stay in Washington for two seconds. Uh. First,
Speaker 1: is the Vocal Well talking about regulation? Lloyd, we heard
Speaker 1: that the Office of the Controller of the Currency is
Speaker 1: now starting the official process where companies like you can
Speaker 1: go and comment of what you want to see rolled back.
Speaker 1: Can you help quantify what the Vocal Rule did like
Speaker 1: with if it was still not in place, what your
Speaker 1: profits would be like what you want to roll back there? Well,
Speaker 1: I'd say with the Vocal Rule, look when they were
Speaker 1: when they were trying to when they were going through
Speaker 1: financial um, financial regulation you could have. You know, you
Speaker 1: could regulate the amount of capital. You can regulate processes,
Speaker 1: you can regulate leverage, you can regulate, and you can
Speaker 1: regulate activities. Um, you can do this transaction. You can't
Speaker 1: do that kind of a transaction. What the vocal rule
Speaker 1: did was it imposed a little bit of a state
Speaker 1: of mind test. You can do. You could take positions,
Speaker 1: but they wanted to. They wanted to damp down speculation.
Speaker 1: But the line between speculation, which has a word thinks
Speaker 1: very easily that we should all back off of, and
Speaker 1: market making facility hating other people's trading. Taking the other
Speaker 1: side of what your client wants to do is also
Speaker 1: a risk taking principal activity, and the line between the
Speaker 1: two is very blurry and indistinct. But with the vocal
Speaker 1: rule basically says, in effect, if you are taking positions,
Speaker 1: points of view in anticipation or in connection with a
Speaker 1: specific client operation, that's good. If you're doing it away
Speaker 1: from that specific it's not good. But if you're a
Speaker 1: market maker sitting in a desk, it's very hard to
Speaker 1: know where that distinction is. Because what really makes a
Speaker 1: market is a million people all at the same time
Speaker 1: buying and selling because someone thinks it's going to go down,
Speaker 1: someone thinks it's going to go up, and then clients
Speaker 1: are join that kind of moving sidewalk that's called a market.
Speaker 1: And really in practice it's been very cumbersome, very hard
Speaker 1: to do, makes people who sit on trading desks very
Speaker 1: very nervous. And I think what it's done is it's
Speaker 1: real put had a dampening effect on liquidity uh in
Speaker 1: the marketplace. And I think the regulators appreciate by the way,
Speaker 1: the regulators didn't cause that. The regulators were filling in
Speaker 1: the regulations of statutes. But I think, um, I think
Speaker 1: now that it's been in place for a while and
Speaker 1: they see how it operates, I think there's a consensus
Speaker 1: it has to be re examining. You know, what we
Speaker 1: have in this country as a problem with employment. We
Speaker 1: want to create jobs. If you want to create jobs,
Speaker 1: you have to have banks that have money to invest.
Speaker 1: Banks make money by taking risk. Now nobody wants speculation.
Speaker 1: As Lloyd points out, it's very hard to tell the
Speaker 1: difference between investment and speculation. After the facts, you can
Speaker 1: look back. If it didn't work, it was speculation, If
Speaker 1: it did work, it was But but nobody knows in
Speaker 1: advance what to do, and so what we want to
Speaker 1: do is make sure that the industry can't get in
Speaker 1: trouble the way it did back eight years ago. But nevertheless,
Speaker 1: it doesn't pull back and stop taking the risks that
Speaker 1: would generate the capital that let us expand our economy,
Speaker 1: give everybody the ability to feed their family, give create
Speaker 1: moneys for curing diseases and advancing art and all of
Speaker 1: those things that we want. And whether or not this
Speaker 1: piece of regulation goes too far, that's Lloyd's express. Some
Speaker 1: of the rules is so obscure it has killing effect
Speaker 1: on activity. So we have a couple more minutes left,
Speaker 1: So Lloyd, I want to ask you a question about
Speaker 1: Goldman Sack specific business. Uh. The question after the quarter
Speaker 1: was your FICK business? How can something not be wrong
Speaker 1: with Fick at the last two quarters, Well, we didn't
Speaker 1: make as much money, so that was that was that
Speaker 1: was wrong. First of all, we have many you know
Speaker 1: we have we're diversified business group, and everyone performed very well,
Speaker 1: so well that we actually did well as a firm.
Speaker 1: Are are we return on equity is doubled? Is still
Speaker 1: for the six months double digit? Are we that being said,
Speaker 1: we didn't perform well. And thick thick is a risk business.
Speaker 1: We don't always perform well. That being said, other people
Speaker 1: who are other firms, who are operating the same environment
Speaker 1: did better than us, and so we are on the
Speaker 1: balls of our feet. You know, we're of course concerned
Speaker 1: about it. In my thirty five years doing this, they've
Speaker 1: been long. They've been periods long, a lot longer than
Speaker 1: this period where we've underperformed only to outperform. It's been very,
Speaker 1: very newsworthy. Not because we're a chronic underperformer, but because
Speaker 1: we've been a chronic outperformer. That being said, we underperformed.
Speaker 1: We know, we know what we have to do and
Speaker 1: we're doing it. And it's a big it's a it's
Speaker 1: it's an execution matter for us, and guess what, that's
Speaker 1: what we do. So execution seems to me like it's cyclical.
Speaker 1: There are many saying that there's a structural or problem
Speaker 1: in that the commodities business because a lot of the
Speaker 1: other guys dumped. There's you've stood by yours, uh and
Speaker 1: you have to rethink that view. Now, well, we've all
Speaker 1: cut back a lot because we had to meet the
Speaker 1: environment but the fact of the matter is if we
Speaker 1: were simply bigger and had more invest in more assets,
Speaker 1: we would have made more money. That's why I tell
Speaker 1: you it's an execution issue because as we should have,
Speaker 1: the expectation is we would do better because historically we
Speaker 1: have and we really haven't. And we know there's several
Speaker 1: reasons in retrospect that we can look at and say, gee,
Speaker 1: we may have slipped up. We tend to be overly
Speaker 1: weighted in our business to a client base, which is
Speaker 1: a terrific lient base, which will never abandon, but we're
Speaker 1: disproportionately involved in trading kind of clients who trade a lot,
Speaker 1: let's say, hedge funds and other things. Again, we're an
Speaker 1: investment bank, the more corporate banks tend and I have
Speaker 1: much more business with corporates and others. That's something that
Speaker 1: we should fix. You shouldn't have let it get that disproportionate,
Speaker 1: but we did. We'll fix it. Some of the products
Speaker 1: we tend to focus on. We are in the commodities business.
Speaker 1: Commodities has been in recession, and very few of the
Speaker 1: other banks that are compared to us are in that business. Well,
Speaker 1: if you look out and about and you look at
Speaker 1: other firms that transacting commodities, commodity firms, oil companies that's
Speaker 1: been in a bit of a recession. That's a cyclical matter.
Speaker 1: Do I think that oil is always going to be
Speaker 1: this price and within three dollars of this price for
Speaker 1: a long time and then it's no, I don't think so.
Speaker 1: But still you have to scale it to the environment
Speaker 1: that we're in. So whether it's the you know, the
Speaker 1: kinds of things that we trade, we have to focus on.
Speaker 1: Whether it's the people we serve. We should be serving
Speaker 1: everybody and not a disproportionately more focused base. And we're
Speaker 1: working on it, but I'll tell you we've been I
Speaker 1: can't say that we're right all the time because we're
Speaker 1: obviously not um, but I will tell you we have
Speaker 1: a good reputation for resilience and adaptation, and that really
Speaker 1: is our core UH skill set. The markets are always changing,
Speaker 1: but never that dramatically. I've been watching Goldman Sex since
Speaker 1: I came to New York in nineteen sixty six, where
Speaker 1: they offered my first job and instead I went to
Speaker 1: Solomon Brothers. This is a firm that has changed with
Speaker 1: the times, has certainly been down years there's up years
Speaker 1: and that sort of thing, but they're still around. And
Speaker 1: if you go back and look at the list of
Speaker 1: companies that were in this business in nineties, six of
Speaker 1: them have gone, so I mean about one quarter right there.
Speaker 1: He's terrific. True. No, but also you know you sit here.
Speaker 1: I mean, look, I've gone through the like Jamie Diamond
Speaker 1: on the taping mark, and that's gonna happen through the
Speaker 1: financial this is we're sitting here with you again. For
Speaker 1: the year so far, double digit. Are we investment, you know,
Speaker 1: merging and acquisitions number one doing great. Inequities are investing
Speaker 1: businesses are doing great. Our asset management business and a
Speaker 1: slow time for for active managers is growing assets consistently.
Speaker 1: There's a ton of things. Everything is going well. But
Speaker 1: but but I do agree that believe me, I'm not.
Speaker 1: I'm not, you know, none of us are hysterical about this,
Speaker 1: but we're focused on it. And I'm sure you're going
Speaker 1: to tell him that the solution to his problem to
Speaker 1: fix what terminals, more terminals and more other services from Bloomberg.
Speaker 1: It's more terms. Well, obviously that's the number one. But
Speaker 1: to wrap up really quickly. Part of the reason also
Speaker 1: as you wind up seeing a lot of Goldman employees
Speaker 1: now in d C. I'm not gonna ask Lloyd that,
Speaker 1: but Mike, I wanted to get your take on if
Speaker 1: you did. Gary Cohen at the Fed, Steve Manutian in there.
Speaker 1: Is that a good thing for you? Do you like
Speaker 1: to see the Wall streeters doing that? Jerry Cohen I
Speaker 1: know very well. He's a very confident guy. Steve Manuchan
Speaker 1: I met once or twice. His father used to be
Speaker 1: a good friend of mine when he was a competitor
Speaker 1: at Goldman. The fact that Goldman has these people that
Speaker 1: government keeps wanting to take says something about the kind
Speaker 1: of people that Goldman hires and the kind of people
Speaker 1: and what they learn at Goldman. And a lot of
Speaker 1: them have records if you go back particular and financial side.
Speaker 1: That is really impressive of these people. Goldman alumni who
Speaker 1: have done enormous things for this country, including incidentally Paulson
Speaker 1: and Steele when they went and bailed out the country
Speaker 1: and the crisis. That has an awful lot to be
Speaker 1: proud of of what they've done to this Let me,
Speaker 1: you didn't ask me, but I'll say I'm enormously proud
Speaker 1: of the Goldman people that went in there. I think
Speaker 1: they're very, very capable, very capable, um and UM. I
Speaker 1: think they've done that at an enormous personal sacrifice to
Speaker 1: themselves and we should. You know, I support them totally,
Speaker 1: and you know, we miss them, but they're doing a
Speaker 1: lot for us because of what they're doing for the country.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast
Speaker 1: platform you prefer. I'm on Twitter at Tom Keene David Gura.
Speaker 1: Is that David Gura before the podcast? You can always
Speaker 1: catch us worldwide. I'm Bloomberg Radio.